Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper presents an analytical and empirical analysis of a parsimonious model framework that accounts for a dependence of bond and bank loan recoveries on systematic risk. We extend the single risk factor model by assuming that the recovery rates also depend on this risk factor and follow a logit-normal distribution. The results are compared with those of two related models, suggested in Frye (2000) and Pykhtin (2003), which pose the assumption of a normal and a log-normal distribution of recovery rates.We provide estimators of the parameters of the asset value process and their standard errors in closed form. For the parameters of the recovery rate distribution we also provide closed-form solutions of a feasible maximum-likelihood estimator for the three models.The model parameters are estimated from default frequencies and recovery rates that were extracted from a bond and loan database of Standard&Poor's. We estimate the correlation between recovery rates and the systematic risk factor and determine the impact on economic capital.Furthermore, the impact of measuring recovery rates from market prices at default and from prices at emergence from default is analysed. As a robustness check for the empirical results of the maximum-likelihood estimation method we also employ a method-of-moments.Our empirical results indicate that systematic risk is a major factor influencing recovery rates. The calculation of a default-weighted recovery rate without further consideration of this factor may lead to downward-biased estimates of economic capital.Recovery rates measured from market prices at default are generally lower and more sensitive to changes of the systematic risk factor than are recovery rates determined at emergence from default. The choice between these two measurement methods has a stronger impact on the expected recovery rates and the economic capital than introducing a dependency of recovery rates on systematic risk in the single risk factor model. Keywords: asset correlation, New Basel Accord, recovery rate, LGD, recovery correlation, single risk factor model JEL Classification: G 21, G 33, C 13 Non-technical SummaryThis paper analyses three credit risk models that account for systematic risk in recovery rates of bonds or loans. The systematic risk is driven by a single unobservable factor, similar to the single risk factor model that was used to derive the risk weight function of the internal ratings based ap...

We develop a reduced-form model that allows us to decompose bond spreads and CDS premia into a pure credit risk component, a pure liquidity component, and a component measuring the relation between credit risk and liquidity. CDS liquidity has important consequences for the bond credit risk and liquidity components. Besides the credit risk link, we document a liquidity link between the bond and the CDS market. Liquidity in both markets dries up as credit risk increases, and higher bond market liquidity leads to lower CDS market liquidity. Ignoring CDS liquidity results in partly negative liquidity premia, particularly when CDS liquidity is low.

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The liquidity premium in CDS transaction prices: Do frictions matter? CFR Working Paper,